To add, or not to add, a DC?

By Tom Nightingale|Sunday, March 02, 2014

On Second Thought

with Tom Nightingale

Your distribution center is maxed out with inventory with no possibility for expansion. It’s not in the most strategic location. Customer service is declining.
What’s the answer? Add a new DC, right?
This seems logical, but it’s not necessarily the correct path.
Today’s business climate presents companies with a challenge. Customers are more demanding than ever, requiring companies to skinny delivery times to meet those needs. However, transportation costs are spiking and capacity shortages are cropping up daily, which means putting a premium on customer service comes with a price.
Adding a distribution center to your network provides numerous benefits, but it also creates issues that might offset any advantages.
First, and most obvious, an additional DC — provided it’s in the appropriate location — means a faster delivery of product to the end customer, provided your fulfillment process and order-cut times remain the same.
Second, you can leverage regional product lines to improve customer service at a lower operating cost.
The globalization of supply chains offers another benefit. Companies that purchase product from foreign countries can often take advantage of East and West coast port options.
Using regional carriers (parcel, less-than-truckload, and truckload) to service markets is a key consideration when your network might be expanding. These carriers, which serve specific regions, are ideal for shippers with multiple DCs, especially if they’re aligned to the regional carriers’ delivery footprint. Optimal for final-mile deliveries, regional carriers offer a better cost structure, resulting in a lower cost per unit.
An extra DC also provides a layer of protection in case of a natural disaster or power interruption. If one center is temporarily out of commission, the other can fulfill orders in the interim. As the industry continues to improve supply chain resiliency, additional DCs are a serious consideration.
Offsetting these pluses, though, are some cautions.
For one, problems can crop up with inventory management. Because of the variability of markets and the inexact nature of forecasting, companies could find themselves in a bind if their safety stock dips low and an inbound shipment is delayed.
The impact of multisite DCs is perhaps felt most in the increased overhead and subsequent boost in costs. Systems are especially sticky when the facilities use different warehouse management systems (WMS) or if different versions of the same system cannot be integrated. This can require modification or replacement of WMS.
With multiple DCs come forecasting issues. It’s easier to forecast an overall network than region by region. With only one center, you have the right product mix. With a second facility, you have to rationalize on how to split stock among your locations.
Another consideration is the frequency of shipments and ordering patterns. If you have one DC and take weekly shipment of a truckload of product and go through that volume regularly, you can take advantage of favorable truckload rates. However, with a second DC, you might have to switch to a more expensive mode of transportation to maintain the same frequency and volumes at each facility and ensure similar service levels.
So now what? Weighing the pros and cons of adding a DC might not tip the scales decisively one way or the other. But it’s critical due diligence companies need to perform to make a solid decision that delivers a return on investment and helps to achieve your objectives.
Deciding not to add a DC, however, doesn’t mean you have to stay in limbo. Changing your transportation strategy can deliver benefits as well.
A “transportation makeover” can entail the following:

Utilize expedited service to meet the needs of a select subset of your customers. Keep in mind that not every customer needs to be expedited. Take care of your top customers, and not only will you maintain good service but this might outweigh the incremental cost to add a DC.

Add consolidation options through shipment density. One alternative is to use pool or cross-dock operations to service regions of the country. This methodology takes advantage of a lower-cost truckload mode to move smaller shipments into regional markets for delivery.

Another option is multi-stop truckloads. If you’re currently shipping LTL coast to coast, the drill is predictable — and expensive. Stops for cross-docking and stays in bulk facilities clog the route from pickup to final destination. With numerous touches, the chance for damage increases greatly.
Being able to respond nimbly to changes in the market or customer demand, or even unforeseen shifts in the supply chain, is a necessity in today’s environment. Although distribution networks are based in part on educated assumptions about customers, markets and inventory needs, volatility often changes the game.
Your distribution strategy — and its moving parts — must be flexible enough to contain spiraling costs and meet customer needs. It’s not an “either-or.”
Where you have options is in what you do with this agility. Will adding a DC raise your competitive advantage, ensuring that your customers receive shipments more quickly? Or are you better served by reconfiguring your transportation model to capitalize on more-favorable cost structures and efficiencies?
It might not be as simple as “Out of room = Add a DC.” Look at your situation holistically and make sure that the strategic goal for your market is aligned with your company’s service strategy. And assess the potential benefits, options and pitfalls of such an important decision.
Nightingale is the president of GENCO Transportation Logistics and can be reached by email.